Items where Keyword is "micro-structural level" (Publications and Working Papers)

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Onnela, Jukka-Pekka, Toyli, J and Kaski, Kimmo
(2009)
Tick size and stock returns.
Physica A: Statistical Mechanics and its Applications, 388 (4).
p. 441.
(Cited 2 times in Web of Science.)
Link to full text available through this repository.

Abstract

Tick size is an important aspect of the micro-structural level organization of financialmarkets. It is the smallest institutionally allowed price increment, has a direct bearingon the bid–ask spread, influences the strategy of trading order placement in electronicmarkets, affects the price formation mechanism, and appears to be related to the long-termmemory of volatility clustering. In this paper we investigate the impact of tick size on stockreturns.Westart with a simple simulation to demonstrate how continuous returns becomedistorted after confining the price to a discrete grid governed by the tick size.Wethen moveon to a novel experimental set-up that combines decimalization pilot programs and crosslistedstocks in New York and Toronto. This allows us to observe a set of stocks tradedsimultaneously under two different ticks while holding all security-specific characteristicsfixed. We then study the normality of the return distributions and carry out fits to thechosen distribution models. Our empirical findings are somewhat mixed and in some casesappear to challenge the simulation results.